Leasing premises: what you need to know

Sarah Stowe

Many franchisees lease commercial premises for their business. The lease may be with the franchisor as either landlord or head tenant, or with an independent landlord. The lease contract is separate from the franchise agreement, and a successful franchise requires both to work ‘hand in glove’. Unfortunately this doesn’t always happen, and can lead to major commercial disputes.

This article identifies two fundamental questions you need to answer before you enter a lease, and points out some areas where things can go wrong.

Is the lease subject to State and Territory retail lease laws?

Each State and Territory has its own law regarding retail leases. In Victoria, it is the Retail Leases Act 2003 (Vic). While these laws are quite similar in many respects, they also have their differences. One of the key differences is how ‘retail premises’ are defined. 

In Victoria, the definition of retail premises is very broad, covering (unspecified) goods and services provided by retail from those premises. 

In New South Wales, the Retail Leases Act 1994 (NSW) definition includes all premises in retail shopping centres, as well as other businesses not in retail shopping centres which are types of businesses specified in a schedule to the Act. This list of businesses is predominantly of businesses selling goods.

So, a franchise business in Victoria offering massage services would be covered by the Victorian Retail Leases Act regardless of whether it was located in a shopping centre or not, but would be covered by the New South Wales Act only if located in a shopping centre.

Retail leases (or tenancy) acts provide rights and obligations on landlords and tenants of premises covered by those Acts. Franchisees need to determine if their businesses are covered by the Act in their particular State or Territory, and understand the implications of those laws on their businesses.

Who is the landlord?

There are three possibilities:

1. The franchisor is the owner of premises and leases those premises to the franchisee

In this case, there should be perfect alignment of the requirements of the franchise agreement and the terms of the lease. Nonetheless, there are two contracts and the franchisor will have contractual rights against the franchisee as both tenant and franchisee. 

If retail leasing legislation applies to the premises, the tenant may have some rights by law which differ from those under the franchise agreement which can cause problems.

For example, in Victoria there are only limited circumstances by which a landlord can refuse to assign the lease to a purchaser of the tenant’s business. However, the franchise agreement may provide the franchisor with much greater scope to determine who can purchase the franchise business.

2. The franchisor leases premises from a third party landlord, and then sub-leases to the franchisee

The Victorian Retail Leases Act applies between a sublessee and head tenant as it does between a tenant and landlord. In this scenario, the important point to note is that there is no direct contractual relationship between the franchisee and the landlord. The head tenant is, effectively, the franchisee’s ‘landlord’ for the purposes of the lease. 

The head tenant franchisor will generally pass all lease costs through to the franchisee. If the franchisee has any problems with the lease, its recourse is with the head tenant franchisor, not with the landlord, which can raise issues.

For example, the landlord seeks payment of outgoings from the head tenant franchisor for owners corporation charges (such as cleaning and security costs). The head tenant franchisor has no interest in questioning these costs, as it simply passes them through to the franchisee for payment. If the franchisee questions the costs, the head tenant franchisor may have no interest in seeking clarification or relaying the concerns to the landlord.

Usually the duration of a sublease is for one day less than the duration of the head lease.  If there is no head lease, there can be no sublease.

3. The franchisee leases premises from a third party landlord

The main pitfall to avoid in this scenario is inconsistency between obligations of the franchisee under the lease and the franchise agreement.  For example, a franchise agreement may require signage of a certain size and design to be displayed in a certain location at premises.  However, most leases will require the landlord to approve any signage and its location.  A landlord may not agree (and does not have to agree) to signage required by a franchisor.

Another potential inconsistency is the duration of the lease and the franchise agreement. Ideally these are coincident. 

If they are not, the franchise agreement may end while the tenant continues to have lease commitments, or the lease may end while the franchise agreement continues. Options in leases provide tenants with the right (but not the obligation) to continue the lease. Also be aware of the timing required to exercise lease options, and the timing and processes involved in any renewal of a franchise agreement.

What if there is a dispute?

In Victoria, retail lease disputes must first be referred to the Victorian Small Business Commissioner for attempted resolution through mediation, before they can progress to litigation. Similar arrangements apply in New South Wales, South Australia and Western Australia.  The Small Business Commissioners provide a quick, low cost and effective alternative dispute resolution service. 

If the retail leases laws of the State do not apply to the particular premises, these disputes may also progress to Small Business Commissioners, although there is no statutory obligation for this to occur.

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